Johnson v. Fountain, 200 N.C. 388 (1931)

Feb. 25, 1931 · Supreme Court of North Carolina

200 N.C. 388

C. A. JOHNSON, Sinking Fund Commissioner of the Town of Tarboro, North Carolina, v. V. E. FOUNTAIN and MRS. SUE FOUNTAIN, Administratrix of L. E. FOUNTAIN, Deceased.

(Filed 25 February, 1931.)

1. Bankruptcy E c — Where claimant has actual knowledge of bankruptcy proceedings in time to file claim and does not do so, claim is barred.

Where the maker of a note and the administratrix of a deceased endorser are sued by the payee, and the administratrix has paid the note and seeks to recover from the maker, and the maker sets up that he had been discharged in bankruptcy from liability on the claim, although he had failed to list the claim in the schedule of his liabilities, and introduces evidence tending to show without contradiction that the payee and the administratrix had actual notice of the bankruptcy proceedings in ample time to have filed the claim within six months after the adjudication of bankruptcy: SeM, sufficient to support an instruction that if the jury believed tbe evidence, they sbonld answer tbe issue in defendant’s favor as to whether the claim was barred, and an instruction in effect directing a verdict for tbe administratrix if she bad no notice or oppor- . tunity to attend the first creditor’s meeting, is reversible error.

2. Evidence D c — Where pleadings do not raise an issue as to estoppel evidence tending to support an estoppel is incompetent.

Where a discharge in bankruptcy is a bar to the liability of a maker of a note, parol evidence offered as an estoppel to the plea of discharge is incompetent when tbe pleadings do not raise the issue of such estoppel.

3. Bankruptcy C d — Person who is surety on debt of bankrupt may prove claim ip creditor’s name if he fails to do so.

Under the provisions of the bankrupt act a person securing the debt of a bankrupt by individual undertaking may prove the claim against the bankrupt in the creditor’s name, or if he discharges the claim in whole or in part he is subrogated to the rights of the creditor, and failure to prove a claim provable under this provision results in the claim being barred by the bankrupt’s discharge.

’Appeal by defendant, V. E. Fountain, from Oranmer, Jat November Term, 1930, of EdgecoMbe.

New trial.

Tbis action was begun on 12 July, 1928. In bis complaint, plaintiff alleges tbat on or about 1 January, 1926, tbe defendant, Y. E. Eountain, as maker, and L. E. Fountain, intestate of tbe defendant, Mrs. Sue Eountain, administratrix, as endorser, executed a promissory note by wbicb they promised, jointly and severally, to pay to tbe plaintiff or bis order, on or before 1 January, 1927, tbe sum of two thousand dollars, witb interest at tbe rate of six per cent per annum after date, for value received; and tbat tbe amount of said note, witb interest tbexeon, is now due aud payable, no part thereof having been paid.

On these allegations, plaintiff prays judgment tbat be recover of tbe defendant, Y. E. Eountain, as principal, and of tbe defendant, Mrs. Sue Eountain, administratrix of L. E. Eountain, deceased, as endorser, tbe sum of $2,000, witb interest thereon from 1 January, 1927, and tbe costs of tbe action.

Tbe defendant, Y. E. Eountain, answering tbe complaint, admits tbe allegations therein, and in bar of tbe “right of any party to tbis action to recover of him tbe amount of said note,” alleges:

“(a) Tbat on 6 December, 1926, an involuntary petition in bankruptcy was filed against him in tbe District Court of tbe United States for tbe Eastern District of North Carolina; tbe defendant, Y. E. Eountain, then went into said court and admitted bis bankruptcy aud filed in said court bis schedule, setting forth a list of bis creditors aud their respective places of residence (except as hereinafter modified) and tbe amount due each, and also an inventory of bis property, rights, credits and effects, of every kind and nature, and alleged tbat be was a resident and citizen of tbe Eastern District of North Carolina, and was owing debts which had not been created in consequence of a defalcation as a public officer, or as an executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity, and that he was unable to pay said debts, and other matters and things set forth more particularly in said schedule.

(b) That afterward, to wit, on 14 December, 1926, the defendant, Y. E. Fountain, was by said court duly adjudged a bankrupt, and afterward, to wit, on 3 October, 1927, a decree was entered by Hon. I. M. Meekins, United States Judge for the Eastern District of North Carolina, discharging the defendant from all his debts.

(c) That the cause of action set forth in the plaintiff’s complaint was due and owing to the plaintiff before the defendant, Y. E. Fountain, was declared a bankrupt, and before the said Y. E. Fountain, defendant, received his discharge, as hereinbefore set forth, and said debt was one provable against his estate in bankruptcy, and was not created in consequence of a defalcation as a public officer, or as an executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity.

(d) That this defendant, Y. E. Fountain, did not set forth in his schedule the indebtedness sued on in this action, nor the name of the plaintiff in this action, or that said note was endorsed by L. E. Fountain, or that said L, E. Fountain or Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, was liable as an endorser on said note, the said L. E. Fountain having died on 23 November, 1926, and Mrs. Sue Fountain having qualified as his administratrix before the clerk of the Superior Court of Edgecombe County on 18 December, 1926; the reason thereof being that this defendant, during all of said time, was under the impression that he had paid plaintiff in full the note sued on in this action, by the substitution of another note due this defendant by another, which last note was secured by some collateral security.

(e) That although the said V. E. Fountain, defendant, did not file in said court the claim or note sued on in this action, yet both the plaintiff in this action, and Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, had full and actual knowledge, and full and actual notice, of the proceedings in bankruptcy instituted against the said Y. E. Fountain, defendant, from the very beginning to the end of said bankruptcy proceedings, with full and ample opportunity to take part in said proceedings in bankruptcy against the said Y. E. Fountain, defendant, from the beginning to the end of the same.

(f) That neither the plaintiff in this action nor Mrs. Sue Fountain, administratrix of said L. E. Fountain, deceased, filed the claim of the plaintiff in this action with the trustee of said Y. E. Fountain, nor did they take any part in said bankruptcy proceedings against said Y. E. Fountain, defendant.

(g) That the defendant, Y. E. Fountain, is advised, informed and believes, and so avers, that in consequence of the plaintiff and Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, having full knowledge of the bankruptcy proceedings instituted against said Y. E. Fountain, defendant, from its beginning to its end, and their consequent failure to take any part in said bankruptcy proceedings, or in the court, and to file in court the note or claim sued on in this action, the defendant, Y. E. Fountain, is completely discharged as to any liability for and on account of said note or claim sued on, and that there can be no recovery against him by any one in this action for and on account of said note or claim.”

On the allegations in this answer, in support of his plea in bar, the defendant, Y. E. Fountain, prays judgment that the action be dismissed as to him, and that it be adjudged that he is not liable for and on account of the note or claim sued on in this action, and that he go without day and recover his costs.

The defendant, Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, answering the complaint, admits the allegations therein; further answering the complaint, the said defendant alleges that she has in hand certain certificates of stock deposited by the defendant, Y. E. Fountain, as collateral security for the note sued on. She prays that said certificates of stock be sold under the orders of the court, and that the proceeds of said sale be applied as a payment on the note sued on in this action. She further prays for judgment that the plaintiff recover of her, in her administrative capacity, only the amount due on said note, after the proceeds of the sale of the collateral security held by her have been applied as a payment on s'aid note, and that the defendant, Y. E. Fountain, as maker of said note, is primarily liable for the amount of the said judgment, and that she, as administratrix of L. E. Fountain, the endorser of said note, is secondarily liable for said amount.

Neither the plaintiff nor the defendant, Mrs. Sue Fountain, adminis-tratrix of L. E. Fountain, deceased, filed a reply to the further answer of the defendant, Y. E. Fountain, in which the said defendant alleges his discharge in bankruptcy, and pleads said discharge in bar of any recovery against him in this action.

On 13 August, 1928, on motion of attorneys for the plaintiffs, judgment was rendered by the clerk of the Superior Court of Edgecombe County on the pleadings that the plaintiff recover of the defendant, Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, as endorser of the note sued on in this action, the sum of $2,000, with interest thereon from 1 January, 1927, and the costs of the action. In said judgment it was ordered “that this cause be transferred to the civil issue docket for trial upon the issues raised by the pleadings.” There was no exception to or appeal from this judgment.

It appears from the record that on 11 February, 1929, the defendant, Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, paid to the plaintiff the amount of said judgment, and that thereupon the plaintiff duly assigned said judgment to a trustee for said defendant.

In accordance with the order of the clerk of the Superior Court, the action was tried at November Term, 1930, of the Superior Court of Edgecombe County. At this trial the following issues were submitted to the jury:

“1. Was the claim sued on in this action, to wit, a note executed by V. E. Fountain and endorsed by L. E. Fountain, listed among the liabilities of V. E. Fountain, bankrupt?

2. Did Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, have notice of the bankruptcy of V. E. Fountain in time to avail herself of all her rights as a creditor of the bankrupt’s estate?”

The first issue was answered “No,” by consent.

The defendant, Y. E. Fountain, assumed the burden on the second issue and offered in evidence a certified copy of an order made by the Honorable I. M. Meekins, U. S. District Judge, in the matter of Y. E. Fountain, bankrupt, and dated 3 October, 1927. By this order the defendant, Y. E. Fountain, bankrupt, was discharged from all debts and claims, provable under the acts of Congress against his estate, which existed on 6 December, 1926, excepting such debts as are by law excepted from the operation of a discharge in bankruptcy.

The defendant testified that he did not list the note sued on in this action in the schedule of his debts and liabilities filed by him in the bankruptcy proceeding; that the plaintiff in this action, however, had actual knowledge of the pendency of said proceeding within teu days after the petition therein was filed by his creditors, and talked with the witness about the proceeding; and that his codefendant, Mrs. Sue Fountain, administratrix of L. E. Fountain, deceased, who had endorsed the note sued on in this action, also had actual knowledge of said bankrupt proceeding, during the month of January, 1927, and talked with the witness about the jwoceeding, and its effect upon her liability as administratrix of L. E. Fountain, deceased, on said note. The witness said: “My estate was closed about six months after I was adjudged a bankrupt on 14 December, 1926. Notice of the first meeting of creditors was published in a newspaper.” The first meeting of creditors was held in Tarboro, N. C., on 4 January, 1927, pursuant to the notice.

The defendant, Mrs. Sue Fountain, administratrix, testified that the. first time she knew that the defendant, Y. E. Fountain, was in bank-, ruptcy, was in January, 1927, when she was notified by the bank that the note sued on in this action had not been paid, when it became due on 1 January, 1927. She then talked with Y. E. Fountain and he told her that he was in bankruptcy. She said: “I found out about his being-in bankruptcy when I called him up and asked him what he was going to do about the note. I found out in January, 1927, that Y. E. Fountain was in bankruptcy. I do not remember the day of the month.” The witness testified that she did not see the notice in the newspaper of the first meeting of the creditors of Y. E. Fountain, bankrupt.

The witness testified further that on one occasion during the sum'mer of 1927 — possibly in June — she had a conversation with Y. E. Fountain about filing a claim on the note in the bankrupt court; that he told her on that occasion that he had not’ listed the. note in the schedule of his debts and liabilities filed by him in the bankrupt court, and did not want her to file a claim on account of the note; that he was going to pay every penny of the note.

The-'defendant, Y. E. Fountain, in apt time, objected to this testimony and excepted to the refusal of; the court to exclude the same as evidence. i

The witness further testified thdt 'she did not file a claim on the note in the bankrupt court, and received no dividend from said court on account of the note sued on in this i action.

There was no evidence tending to show that the plaintiff, as 'payee, filed a.claim in the bankrupt cdurt, or received a dividend from said court, on account of said note.

After the close of all the evidence; and in apt time, the defendant, Y. E. Fountain, requested the court, .in¡'writing, to instruct the jury as follows: • ■

. “If you believe the evidence in this case, I charge you to answer the second issue, ‘Yes.’ ”

To the refusal of the court to so instruct the jury, the said defendant excepted. / ' ,"

■ The: court instructed the jury that if'they found from the evidence that the defendant, Mrs. Sue Fountain, administratrix, did not see the notice published in the newspaper calling the first meeting of the creditors of Y. E. Fountain, bankrupt,son 4- January, 1927, and had no opportunity to attend said meeting and file a clararon the note sued on in this action, they should answer the second issue, “No.”

To this instruction the defendant, Y.-. E. Fountain, duly excepted. '

The jury answered the second issue, “No.” From judgment on the verdict, and on the admissions in the pleadings, that the defendant, Mrs, Sue Fountain, administratrix of L. E. Fountain, deceased, recover of tbe defendant, Y. E. Fountain, tbe sum of $2,000, witb interest tbereon from 1 January, 1926, and tbe costs of tbe action, tbe defendant, Y. E. Fountain, appealed to tbe Supreme Court.

H. S. Phillips for defendant, V. F. Fountain.

Geo. M. Fountain for defendant, Mrs. Sue Fountain, administratrix.

CoNNOR, J.

In Williams v. U. S. Fid. & Guar. Co., 236 U. S., 549, 59 L. Ed., 713, it is said: “It is tbe purpose of tbe bankrupt act to convert tbe assets of tbe bankrupt into cask for distribution among creditors, and tben to relieve an bonest debtor from tbe weight of oppressive indebtedness, and permit bim to start afresb free from obligations and responsibilities consequent upon business misfortunes.” Tbe provisions of tbe bankrupt act, enacted by Congress as authorized -by the Constitution of tbe United States, are just to creditors, and are founded upon a wise public policy. They assure each creditor that tbe assets of bis insolvent debtor will be equitably distributed among all bis creditors. They relieve an bonest debtor of liability for debts which be has no hope of paying and after bis discharge, enable bim to perform bis duties as a member of society, free from embarrassments which would destroy bis self-confidence and deprive bim of all hope of economic independence. In tbe instant case, there is no suggestion on tbe record that tbe creditors of Y. E. Fountain, bankrupt, who proved their claims against bis estate in bankruptcy, have not received, or that said bankrupt was not entitled to all tbe relief afforded by tbe .just and wise provisions of tbe bankruptcy act.

It is provided, in section 35 of tbe bankruptcy act that “discharge in bankruptcy shall release a bankrupt from all bis. provable debts,” except such as are specified therein, including such as “have not been fully scheduled in time for proof and allowance, witb tbe name of tbe creditor, if known to tbe bankrupt, unless such .creditor bad notice or actual knowledge of tbe proceedings in bankruptcy.”

Tbe note sued on in this action was a provable debt of tbe defendant, Y. E. Fountain, at tbe date of tbe filing of tbe petition by which tbe proceedings in which be was adjudged a bankrupt were instituted. This debt was not listed in tbe schedule filed by tbe bankrupt in time for its proof and allowance as a claim against bis estate. Tbe said defendant was not, therefore, released from liability on tbe note by bis discharge, unless, as alleged by bim, bis creditor bad notice or actual knowledge of tbe proceedings in bankruptcy against bim.

Tbe uncontradicted evidence at tbe trial tended to show that tbe plaintiff, who was tbe creditor of tbe bankrupt, witb respect to the note set out in the complaint, bad actual knowledge of tbe bankruptcy proceeding within ten days after the filing of the petition, and that he did not prove or file his claim on account of the note.

It is further provided in the bankrupt act that “whenever a creditor whose claim is secured by the individual undertaking of any person fails to prove such claim, such person may do so in the creditor’s name, and if he discharge such undertaking in whole or in part, he shall be subrogated to that extent to the rights of the creditor.” Section 93 (i). Accordingly, it has been held that a claim provable under this provision, but not proved, is barred by the bankrupt’s discharge. Smith v. Wheeler, 55 App. Div., 170, 66 N. Y. S., 780.

All the evidence at the trial tends to show that the defendant, Mrs. Sue Fountain, administratrix, had notice or actual knowledge of the bankruptcy proceedings against the defendant, Y. E. Fountain, some time during the month of January, 1927. The defendant was adjudged a bankrupt on 14 December, 1926. As a creditor or other person entitled to prove a claim against the estate of a bankrupt has six months from the date of the adjudication within which to prove and file his claim, the said defendant had ample time, after she first knew that Y. E. Fountain was in bankruptcy, to prove and file a claim on the note sued on in this action. There was error in the refusal of the court to instruct the jury as requested by the defendant, Y. E. Fountain, that if they believed all the evidence in this case, they should answer the second issue, “Yes.” It follows that there was error in the instructions of the court to the jury which the defendant, Y. E. Fountain, assigns as error in this appeal.

The testimony of Mrs. Sue Fountain, administratrix, as to her conversation with the defendant, Y. E. Fountain, during the summer of 1927 — possibly in June — in which he told her that he had not listed the note sued on in this action in the schedule of his debts filed in the bankruptcy proceeding, and that he did not want her to file a claim on the note, was incompetent as evidence, and should have been excluded. This testimony was offered, manifestly, for the purpose of supporting a contention that the defendant, Y. E. Fountain, was estopped from pleading his discharge in bankruptcy as a bar to.a recovery against him in this action. It is sufficient to say that no issue as to such estoppel is raised by the pleadings. Nor was evidence tending to show an estoppel relevant to the matters involved in the second issue, which alone was submitted to the jury.

For errors in the trial of the action the defendant, Y. E. Fountain, is entitled to a

New trial.